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muskhere
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Joined: 23 Oct 2009
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| Posted: 14 Nov 2009 at 08:51 | IP Logged
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Johnson Co. is preparing its master budget for the first quarter of next year. Budgeted sales and
production for one of the company's products are as follows:
Month Sales Production
January 10,000 12,000
February 12,000 11,000
March 15,000 16,000
Each unit of this product requires four pounds of raw materials. Johnson's policy is to have
sufficient raw materials on hand at the end of each month for 40 percent of the following month's
production requirements. The January 1 raw materials inventory is expected to conform with this
policy.
How many pounds of raw materials should Johnson budget to purchase for January?
a. 11,600
b. 46,400
c. 48,000
d. 65,600
ANSWER:
Choice "b" is correct.
how is it calculated
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venugopal
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| Posted: 14 Nov 2009 at 10:11 | IP Logged
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The company requires to have 40% of raw material inventory for the next months production so its begining raw material inventory on January 1 is 19,200 pounds (12,000 units*4*0.4).
Production needs for January = 12,000*4 = 48,000
Add desired ending inventory = 11,000*4*0.4 = 17,600
Deduct beginning Inventory = 12,000*4*0.4 = 19,200
So 48,000+17,600-19,200 = 46,400
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cpagoal2009
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| Posted: 14 Nov 2009 at 11:34 | IP Logged
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@ venugopal
why Production needs for January = 12,000*4 = 48,000,
Why not 10000*4=40000
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lkbcpa2b
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| Posted: 14 Nov 2009 at 11:40 | IP Logged
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Cpagoal2009, you are looking at sales and not production.
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venugopal
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| Posted: 14 Nov 2009 at 11:52 | IP Logged
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lkbcpa2b is right. The reason people get this type of question wrong is that they focus on sales and not production. These kind of calculations are sometimes long, but they are not difficult once you understand them.
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